By David Barwick

HELSINKI (MNI) – The danger of second-round inflation effects in
the Eurozone has increased, European Central Bank Governing Council
member Yves Mersch said in an interview released Friday.

The head of the Luxembourg Central Bank told German business weekly
WirtschaftsWoche that “the danger of second-round effects — i.e. an
increase of the inflation rate as a result of excessive wage agreements
— has risen.”

Moreover, he said, the strong economies of emerging market
countries are putting “massive pressure” on global commodity prices.

With respect to a possible further interest rate hike by the ECB,
Mersch asserted that “an important date for us are the quarterly
forecasts of inflation and growth in the Eurozone. We will get the next
data about these in June. We will look at these and then decide when we
have to move.”

Mersch suggested that he views the Securities Market Program, under
which the ECB purchases sovereign debt on secondary markets, as
effectively finished.

“As far as the bond buying program of the ECB is concerned, I can
only say: ‘Mission accomplished,'” he declared.

He suggested that the new European rescue mechanism, the European
Financial Stability Facility (EFSF), could assume the task, observing
that the design of the rescue mechanism is not yet completed. He was
referring to proposed rules that would limit the EFSF and its successor
facility, the European Stability Mechanism, to purchasing bonds only
directly from national governments and only in rare circumstances.

“I do not consider it sensible to absolutely exclude bond purchases
from banks’ holdings,” he affirmed. “When you buy yourself a fire
engine, then you should outfit it with a decent hose, too.”

Like his Council colleagues, Mersch rejected a restructuring of
Greek debt, warning that it could “trigger a bank run and wipe out the
entire banking sector of the country.”

He continued: “That would not just affect the Greeks, but rather
all citizens of Europe who have invested via their insurance and savings
deposits in Greek promissory notes. The Greeks should continue with
their reform program; at the moment that is the best option for
everyone.”

Mersch also cautioned against any dramatic move by monetary
authorities to deal with so-called persistent bidders, saying that “if
the ECB would now close the tap, it could destabilize parts of the
European financial system.”

However, he added, “it is not the task of a central bank to
rehabilitate individual banks. That is the task of the national
governments.”

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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